Why Microsoft and Steve Ballmer just don’t get it

Fri, Jul 31, 2009

Analysis, Featured, News

At a Microsoft Financial Analyst meeting yesterday, Microsoft CEO Steve Ballmer demonstrated, yet again, that he still doesn’t get, or perhaps is unwilling to admit, why people are ditching PC’s and flocking to the Mac in droves.

While looking out into a sea of reporters and analysts, Ballmer noticed the number of computers sporting an illuminating Apple logo on the back and had to comment.

We have low share, by the way, in the investor audience. I can see the Apple logos versus the PC logos. So we have more work to do, more work to do. Our share is lower in this audience than the average audience. But don’t hide it. I’ve already counted them. I have been doing that since we started talking. (Laughter.)

… But anyway, that’s OK. Feel free as long as you’re using Office to go right on ahead.

Well you certainly can’t fault him for not having a sense of humor.

But as Ballmer went on, his words slowly revealed a lack of appreciation for why Apple has been so successful and why Microsoft’s earnings are on a significant decline.

We do not, say, like Apple, believe in low volume, very high prices, very—Apple is a great company, does a fine job. But their model says high margin, high quality, high price. That’s kind of how they come to market. We say we want big market share. But with big market share, you take a lower price.

Ballmer and Microsoft’s focus on market share is so intense as to border on utter foolishness.  What is the purpose of market share if you’re not making money?  Obviously, Microsoft is still a cash cow with revenue in the billions of dollars, but in order to increase share price for shareholders, revenue must increase and chart upwards.  Maintaining a 90+ percent market share with low margin products doesn’t accomplish that.

Also, did anyone else notice that Microsoft talks about Apple’s high margin, high quality, high price products like it was a bad thing?  Microsoft wishes it had Apple’s margins but knows that comparably priced PC’s just wouldn’t sell. So they’ve seemingly convinced themselves that the battle is for market share, which I suppose would be fine if they were actually doing anything to improve on their market share position.  But unfortunately for Microsoft, they’re losing that battle too (in both the PC and smartphone market).  During the last quarter PC sales declined by approximately 4%.  Apple, meanwhile, saw Mac growth come in at 4%.

But Ballmer was just getting started.  Soon thereafter Ballmer explained Apple’s success in the market as being the result of it’s hardware.

And at least when Apple attacks us, the primary attack that comes from Apple is, hey, at the end of the day, we have the coolest hardware.

When you see the hardware, the PC designs that will come out this Christmas with Windows 7, I think that conventional wisdom can begin to really change. There is some really amazing, amazing work. So it is possible to get great hardware innovation, even when hardware and software comes from separate companies.

Wow.  Does anyone have the balls to tell the higher ups at Microsoft, since they can’t figure it out by themselves apparently, that the primary reason people buy Macs is for the software?

Apple undoubtedly has cool hardware, but you know what, so do a lot of other PC manufacturers.  Not every PC may be up to snuff with Apple’s designs, but there are still good number of well-designed Sony Vaio and HP machines out there.  But that’s just secondary.  People don’t wander into Apple Stores, pick up a MacBook and say, “Wow, this build quality is great!  I’ll take two!”.  Rather, the hardware design and high build quality are just parts of an overall user experience that also includes the easy to use and extremely capable OS X.  If it was all about the hardware, as Ballmer implies, then there wouldn’t be a large number of consumers putting copies of OS X onto cheap and poorly built netbooks.

I don’t know if Microsoft is dumb or purposefully ignorant, but as a software maker, it’s taken the arrogant position that their software is on par with Apple and that the hardware makers Microsoft relies on are the ones to blame for shrinking PC sales.  How convenient.  Or as Tim Robbins character from The Shawshank Redemption, Andy Dufresne, might say, “Since I’m forced to use Windows OS at work, I find it decidedly inconvenient that Microsoft won’t accept responsibility for its shoddy OS.”

Microsoft’s woeful ignorance of its own OS is also plainly apparent in its “Laptop Hunter” ads where shoppers are making a strict price to price comparison.  Mac users know that Apple products are more expensive.  It’s been that way for as long as I can remember and it’s hardly a secret.  Price isn’t why consumers purchase Macs, so why would Microsoft waste time advertising how cheap its PC’s are?  Well, because in Microsoft’s mind, Windows is just as good, if not better, than OS X.

And therein lies the problem.  Microsoft lives in a world where high market share = high quality, and that’s probably a lie they’ve been telling themselves since the early 90’s, and that helps explain Ballmers obsession with market share.  It’s a lot easier to announce and believe that you have a superior product if you have a high market share than it is to, oh I don’t know, actually put out a superior product.

For far too long now, Microsoft has been happy with the status quo and its insanely high market share, but they’ve done absolutely nothing to warrant keeping that market share.  And now that Mac sales are increasing at the expense of PC’s, MIcrosoft is in panic mode and quite frankly has no idea how to respond.


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5 Comments For This Post

  1. Don Says:

    I’ve seen a lot of posts on various sites concerning Balmer’s comments. It seems quite odd to me that nobody has commented on what I consider to be quite obvious: Balmer said that Apples’ “model says high margin, high quality, high price…We say we want big market share. But with big market share, you take a lower price.” Note that did not say big market share, lower price and high quality. In fact, his post implies that Microsoft is willing to settle for lower quality in all their products in order to get market share.

    Years ago, one pundit wrote “We use Windows not because it’s good, but because it’s good enough.” That’s been their philosophy. Crank it out and sell it. Tell people it’s good until you’re blue in the face and they’ll believe it.

    As a result, they have something like 85% of the market. Apple has about 10% of the market. But Apple’s value (“Market Cap”: over $147 Billion) is almost two-thirds of Microsoft’s value (almost $212 Billion). If Apple had 85% of the market, they’d be worth almost $1.25 TRILLION!

    Low quality. Financial failure. Get it all with Microsoft!

  2. Bill Says:

    “Microsoft wishes it had Apple’s margins but knows that comparably priced PC’s just wouldn’t sell.”

    Just to be clear, Microsoft’s gross margins are obscenely high, much higher than Apple’s. MS has margins in the 60s,compared to Apple’s in the 30’s. It’s Microsoft’s partners (Dell, HP, etc.) whose margins are razor thin.

    Of course, Microsoft does make less when a partner sells a netbook with XP, than when they sell a higher end system with Vista Home Premium, so the race to the bottom has hurt their margins.

    But don’t imagine Microsoft’s margins are low. They’re not.

  3. iphonerulez Says:

    Microsoft (Ballmer) says Apple is no threat to Microsoft. But it sure does seem with the way Microsoft keeps trying to counter Apple in app stores, retail stores, media players it sure seems like it’s being threatened. Microsoft has such huge market share and it only needs to maintain three good software items: Windows OS, MS Office and MS Server and it makes a bundle without needing all the other junk like XBox 360 or Zune or any retail stores. I’m not sure if the Windows Mobile platform is any good so I can’t say anything about it.

    Apple didn’t put Microsoft where it is. Microsoft did that by itself. They built the OS to be just good enough. MS didn’t demand PC companies to keep up any quality standards or customer service standards. MS didn’t care as long as it could push as many copies of Windows on computers, no matter what. Microsoft had the means of building a great operating system over the years, but maybe it’s not that easy if you have to keep legacy code. Microsoft should have forced companies to upgrade hardware every five years so that if they implemented a new OS it would be smaller and faster, not some lumbering giant OS filled with outdated code. Maybe Microsoft should have had two OSes. One for business users and one completely different for home users.

    Microsoft is going to be putting a heavy gamble on Windows 7 being everything for everyone. It’s going to be hard to live up to those claims. One more big miss and revenue is going to continue to plunge as users just stay with Windows XP. XP is probably the most I’ll ever need because it works fine for me and it doesn’t have a very large footprint. As long as I keep the virii under control, all is rosy for me. No need for Windows 7 at all.

    Now Microsoft is just being greedy. With 90% of desktop market share, that should be good enough. Admittedly saying and trying to take back Apple’s 10% is really sad. They are definitely attempting to be a monopoly. They need to spend more time focusing on quality and customer satisfaction.

  4. Michael Linehan Says:

    Hi Don,

    Don’t want to seem as if I’m nit-picking. It’s just that the figures are even more impressive than the fraction you gave. $147bil/$212bil is well OVER two-thirds the market cap — i.e. 69.3%. :

  5. AdamC Says:

    It’s high time someone send some of Ayn Rand’s books to stevie.

    BTW PCs high market share is mainly attributed to the beige boxes in the enterprise market.

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